Are Gaming Stocks a Good Long-Term Hold?
The gaming industry is huge. According to some estimates, it was worth around US$115 billion in 2018 and, by 2021, it had rocketed to US$138 billion. Others are forecasting that the market could grow to as much as $256.97 billion by the middle of the decade, more than double where it started the decade at.
Market forces were very kind to gaming companies and their investors in 2020 and 2021, with market caps heading skywards right across the board after the initial dip in early 2020.
Companies like Electronic Arts Inc and Take-Two Interactive Software Inc saw their share prices remain fairly consistent after Q1 of 2021, retaining much of the growth from the previous three quarters. However, they’ve started to give back some of those gains in recent weeks and months, though mostly just in line with wider market trends.
So far, gaming has fared much better than other entertainment sectors that enjoyed huge booms in 2020. This is in contrast to companies involved in video streaming that have seen their share prices fall off a cliff in recent months. For example, Netflix started the year at just over US$600 a share and by the end of February had lost almost half, falling to US$372. Similarly, Roku’s current share price of around US$120 is less than 25% of where it was at the end of July 2021.
With that in mind, investors may be asking whether the gaming industry is an attractive offer for a long-term position.
Gaming Is Diverse
The gaming industry is incredibly diverse, far more than music, movies, or television. Of course, there are a handful of global leaders who hold huge market shares, but there are also many smaller indie developers that have easy routes to market through services like Steam, and the Apple App and Google Play stores.
There are also several different form factors that enjoy widespread adoption, from high-end computers to budget smartphones, catering to just about every preference and budget.
Variety in gaming also extends to the content, with developers creating titles that suit every taste. This can be clearly seen in the online casino space where many sites offer hundreds of different video slots, each with a unique theme. When scrolling through a casino’s catalogue of reel-based titles, you’ll find everything from aquatic-themed Fishin’ Frenzy to slots based on films like Top Gun and Ted.
With such diversity, gaming companies have limited their exposure to individual demographics and have a culture of being innovative and creative enough to pivot in the face of changing market demands. This could be an attractive quality to investors that want to buy companies that are able to weather economic storms.
Profits Are Growing
Few industries can manage to become more profitable by giving away their products for free, but that is exactly what has happened with gaming. In the past, publishers sold their titles through retailers and online, with players purchasing the entire game up front and receiving a full copy of it in return.
But after the success of games like Farmville in the late 2000s, the industry has been on the path to doing away with upfront charges, replacing them with microtransactions. These are small but regular payments that players can make to receive additional in-game items either to customise their character or to unlock new features.
While many players choose to avoid them, enough do pay that it is highly profitable for publishers. This model also provides regular income, converting gaming into a SaaS industry. In addition to the increased revenue from these microtransactions, the lower costs of developing new content for an existing game rather than starting from scratch means that margins are fatter than ever for some companies.
On top of that, the number of people taking up the hobby continues to grow. Around half of the developed world plays games, but that still leaves half of the population in those countries to expand to. When you account for the world as a whole, there are still between four and five billion people that the gaming industry can reach out to.
Of course, not everyone will become a gamer, but many will. This room for growth could be an attractive prospect for some investors.